December 11 2008
By Kelly Olsen
South Korea’s central bank carried out its biggest interest rate cut ever Thursday, slashing borrowing costs by a full percentage point to a record low in a bid to stave off possible recession.
The Bank of Korea said it was slashing its benchmark seven-day repurchase rate to 3 percent from 4 percent during a regular policy meeting.
Deteriorating economic data have raised alarm bells that Asia’s fourth-largest economy could fall into its first contraction since 1997, when the country was in the throes of the Asian financial crisis. Exports fell 18.3 percent in November from the same month last year.
“It’s quite surprising,” Citibank Korea economist Oh Suk-tae said regarding the size of the rate cut, which suggests that the bank may think “growth could be zero next year” given South Korea’s export decline and neighboring China’s first fall in exports in seven years in November.
South Korea’s economy slowed in the third quarter and economists have been divided over whether it can avoid a recession. Swiss bank UBS (nyse: UBS – news – people ) issued a bearish forecast last month, predicting that the economy will contract 3 percent in 2009 amid worsening conditions such as increasing non-performing loans, rising corporate failures, falling housing prices and slowing exports.
Citibank’s Oh said he will likely have to lower his forecast for a 2 percent expansion for next year. He said the economy will likely still manage to grow just above 4 percent in 2008. That would be down from 5 percent last year.
“General measures of economic activity are decelerating rapidly,” International Monetary Fund official Subir Lall said in a speech Tuesday in Seoul.
Lall cited slowing consumer spending and exports as well as falling business confidence as evidence for the emerging weakness in South Korea’s economy.
Thursday’s rate cut marked the fourth time the central bank has lowered borrowing costs in the past two months and exceeded the 0.75 percentage point emergency cut on Oct. 27, previously the largest ever.
The rate has gone from 5.25 percent to 3 percent since the cycle of easing began on Oct. 9.
The previous record low for the bank’s benchmark rate was 3.25 percent last seen in October 2005.
South Korea’s benchmark stock index showed little reaction to the decision, rising 0.4 percent to 1,150.33 points in late morning trading.
The South Korean won, which has been battered this year, traded 2.4 percent higher against the dollar at 1,361.
APTN cameraman Yong-ho Kim and APTN producer Hyun-ah Kim contributed to this report.